The CRA has recognized the “unintended impact on Canadians” as a result of the new reporting requirements and will work with the Department of Finance to clarify its guidance about the requirements. As this information becomes available, CRA will communicate it to the public.

Before CRA provided this exemption for bare trusts, penalties for late filings were already going to be waived (except in the case of gross negligence). Instead of penalties, CRA was adopting an education first approach to compliance for this new reporting requirement.

A full exemption for the 2023 tax year is a welcome change. Because bare trusts are not well defined and dependent on the facts of each situation, many charities were uncertain about whether a T3 was required. We trust (pun intended!) that forthcoming information from CRA and Finance will provide the necessary clarity.

What are bare trusts?

As the CRA explains, “bare trust” is not defined in the Income Tax Act. For income tax purposes, a bare trust is

“…a trust arrangement under which the trustee can reasonably be considered to act as agent for all the beneficiaries under the trust with respect to all dealings with all of the trust’s property.”

CRA gives an example: “a property developer establishes a bare trust arrangement that will hold registered title to real property, while the developer retains beneficial ownership.”

What are the new trust reporting requirements?

The main changes to trust reporting are that:

• Many more trusts (subject to certain conditions) must file an annual T3 Return
  • Trusts formed as charities are exempt
  • Registered charities’ internally held trusts are exempt
• Trusts required to file a T3 generally need to complete Schedule 15 to report beneficial ownership information
• Bare trusts are subject to the reporting rules but are exempt from 2023 reporting and future reporting will be subject to clarifications from CRA and Finance

These changes stem from bill C-32, Fall Economic Statement Implementation Act, 2022 (Bill C-32. This bill added new subsections to section 150 of the Income Tax Act, requiring more trusts to file T3s. It also expanded the list of information that must be reported in the T3 Return (see the Income Tax Regulations).

Trusts that are formed as registered charities are specifically excluded, and in November, 2023, CRA confirmed that charities do not have to file separate T3s for internally held trusts.

For more, see our blog post Charities Do Not Have to File T3 Returns for Internal Trusts.

When would T3s normally be due?

The filing deadline depends on the trust’s tax year-end. Generally, trusts are required to have a December 31 tax year-end. The T3 must be filed no later than 90 days after the trust’s tax year-end.

For detailed information about the T3, see CRA’s T3 Trust Guide – 2023

The post Important Trust Reporting Update: Bare Trusts are Exempt for 2023 appeared first on CCCC Blogs.

CRA’s Update

We are very pleased to see that CRA will not require registered charities to file separate T3 Trust Income Tax and Information Returns for internally held trusts.

CCCC and many other stakeholders expressed concern over the possibility that charities would be required to file separate returns for internal trusts (in addition to the T3010) as a result of Income Tax Act amendments in Bill C-32.

We encouraged a solution that emphasized simplicity, clarity and timeliness and are thankful for this positive outcome. This means that CRA will continue its sensible administrative position toward reporting for charities that hold internal trusts, as CCCC and many others urged.

This outcome recognizes that all funds held by charities are already reported on the T3010 and are applied to exclusively charitable purposes. It also recognizes the legislative intent for expanding trust reporting requirements was not aimed at registered charities’ internal trusts, and that transparency is achieved through existing reporting requirements.

What are internal trusts?

CRA has clarified that internal trusts are created when a charity:

• Receives property as a gift that is subject to legally enforceable terms and conditions; and
• Holds the property as the trustee of that trust

Background

Bill C-32, Fall Economic Statement Implementation Act, 2022 (Bill C-32) amended the Income Tax Act (ITA) by adding new subsections to section 150, requiring more trusts to file T3 Trust Income Tax and Information Returns (T3 Return) and adding to the list of information reported in the T3 Return as required by the Income Tax Regulations. While trusts that are formed as registered charities are specifically excluded, there was speculation and uncertainty about whether charities’ internal trusts would continue to be excluded.

If the amendments had been interpreted to include charities’ internally held trusts, reports would have been required 90 days after the end of the calendar year. It could have resulted in significant, additional administrative burdens, legal and professional consulting costs, and a lot of extra (unnecessary) paperwork for CRA.

If you’re looking for more on Bill C-32, check out our (long!) post summarizing its key changes.

The post Charities Do Not Have to File T3 Returns for Internal Trusts appeared first on CCCC Blogs.

What is Bill C-32?

The full name of the Bill is a mouthful: “An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 3, 2022 and certain provisions of the budget tabled in Parliament on April 7, 2022.”

In other words, it’s an act to implement budget and fall economic statement spending promises.

What’s Relevant for Charities?

As with most budget bills, this is a long one. This post is not an exhaustive overview. Instead, we’ve picked out a few items that will be of interest for charities.

DISBURSEMENT QUOTA

Increase to 5% for Property Exceeding $1M

Bill C-32 changes the definition and calculation of disbursement quota (DQ) in the Income Tax Act (ITA).  As promised in the 2022 Federal Budget, the DQ increases from 3.5% to 5% for the portion of property not used in charitable activities or administration that exceeds $1M.

This change is effective for tax years beginning on or after January 1, 2023.

See section 34(1) of Bill C-32; section 149.1(1) ITA.

Management & Administration Not Included

Bill C-32 clarifies that “expenditures on administration and management of the charity” are not deemed to be an amount spent on charitable activities or a gift to a qualified donee (basically, another charity). In other words, these costs don’t count toward a charity’s obligation to meet its DQ.

This change is effective for tax years beginning on or after January 1, 2023.

See section 24(2) of Bill C-32; *new* section 149.1(1.1)(d) of ITA

Discretionary Reduction in DQ

Bill C-32 amends the wording around the Minister’s discretionary reduction of the DQ.

In its current form, when the Minister agrees to reduce the disbursement quota for a charity’s tax year, the amount is “deemed to be an amount expended by the charity.” The new version will have the Minister “specify an amount” and the “disbursement quota shall be deemed to be reduced by that amount.”

Charities must still apply and the Minister still has discretion to grant or not grant the reduction. It’s simply that the prescribed amount is now deemed a reduction rather than an amount expended.

See section 34(4) of Bill C-32; section 149.1(5) ITA

Disclosing Applications for Reduction in DQ

The government can disclose “to any person” the application, information filed in support of a charity’s application, and a partial or full copy of any letter or notice from the Minister to the charity about its application to reduce its DQ.  This change is effective January 1, 2023.

This change is effective for tax years beginning on or after January 1, 2023.

See section 55(1) Bill C-32; s 241(3.2) ITA.

ACCUMULTATION OF PROPERTY

The section allowing charities, with the Minister’s approval, to accumulate property for a specific purpose, on specific terms and conditions, for a specific time, has been repealed.

This change is effective for applications made on or after January 1, 2023.

See section 34(5) of Bill C-32; former section 149.1(8) ITA

TRUST REPORTING

New Trust Reporting Requirements

In section 150(1.1) of the ITA, there is an exemption (s 150(1.1)) to filing required information returns. Bill C-32 changes that section so that there are more kinds of trusts that have to file T3 returns, unless the trust fits into a list of exceptions.

Content of Trust Reporting

Required information for trust reporting is listed in the Income Tax Regulations (ITA Regs). It includes:

• Name, address, date of birth, jurisdiction of residence, taxpayer identification number for each person who is a trustee, beneficiary, or has the ability to exert influence over trustee decisions (re: appointment of income or capital of the trust)

The required information about beneficiaries includes those “whose identity is known or ascertainable with reasonable effort by the person making the return at the time of filing” (s 204.2(2)(a) ITA Regs).

See section 72(1) Bill C-32; section 204.2 ITA Regs

Exceptions to Trust Reporting Requirements

What are those exceptions? There are a lot of them. If the trust:

• Has existed for less than 3 months
• Holds assets of less than $50K through the year and if the assets are one or more of:
  • Money
  • Debt obligation (see (a) of “fully exempt interest” in 212(3))
  • Share, debt obligation or right listed on a designated stock exchange
  • Share of capital stock of a mutual fund corporation
  • Unity of a mutual fund trust
  • An interest in a related segregated fund trust
  • An interest as a beneficiary under a trust with all units listed on a designated stock exchange
• Is required by law (federal, provincial, or rules of professional conduct) for the purpose of the activity regulated by those laws
• Is a registered charity
• Is a club, society or association
• Is a mutual fund trust
• Is a related segregated fund trust
• Is a trust with all units listed on a designated stock exchange
• Is prescribed to be a master trust
• Is a graduated rate estate
• Is a qualified disability trust
• Is an employee life and health trust
• Is a trust under/governed by a deferred profit-sharing plan, pooled registered pension plan, registered disability savings plan, registered education savings plan, registered pension plan, registered retirement income fund, registered retirement savings plan, tax-free savings account, employee profit sharing plan, registered supplementary unemployment benefit plan, first home savings account
• Is a cemetery care trust or trust governed by an eligible funeral arrangement

See section 35(1) Bill C-32; *new* section 150(1.1) ITA

Clarifications

A trust includes bare trusts and arrangements. What is a bare trust? A bare trust is one where the trustee’s “only function is to hold legal title to the property,” where that title is subject to the control and instructions of the beneficiary.

See section 35(2) Bill C-32; *new* section 150(1.3) ITA

The reporting does not require disclosure of information subject to solicitor-client privilege.

See section 35(2) Bill C-32; *new* section 150(1.4) ITA

Consequences for False Information or Omission

A person or partnership that fails to file a required trust return or makes a false statement (knowingly or due to gross negligence) is subject to a penalty equal to the greater of:

• $2,500 or 5% of the highest amount of the total fair market value of all property held by the trust.

See section 41(2) Bill C-32; *new* section 164(5), (6) ITA

Effective Date

This change is effective for tax years that end after December 30, 2023, one year later than in previously-released draft legislation.

CRA INFORMATION-GATHERING AUTHORITY

Earlier this year, during the Federal Finance Consultations on draft tax proposals, we fully explained the background of the changes to CRA’s information-gathering authority. In short, these changes respond to a 2019 Federal Court of Appeal decision (Cameco) that ruled the Minister of National Revenue exceeded its authority when CRA auditors compelled a corporation’s employees to give answers in an oral interview.

According to the Charter statement about Bill C-32, the amendments are to “modernize the information-gathering power” in s 231.1 and to clarify that, during an audit, people may be required “to attend at a place designated by the [government] authorized person or by video-conference and to answer the questions orally” [emphasis added].

See section 54(1) of Bill C-32; section 231.1(1) ITA

The post Federal Bill C-32: What’s Relevant for Charities? appeared first on CCCC Blogs.

Why a new act?

One of the key reasons for a new act was to reduce costs and increase clarity.

The old act was mostly concerned with trusts from wills, but trusts are used more broadly. The new act fills gaps by including those broader uses. It also creates default rules so that people setting up trusts don’t have to include every single term; instead, they can rely on the legislation.

The new act implemented recommendations from the Alberta Law Reform Institute. It generally follows a uniform trustee act proposed by the Uniform Law Conference of Canada. This group aims to harmonize laws across Canada.

What about charities?

For charities, the new act makes it easier to vary charitable trusts. It saves them from failing when the original purpose of the trust cannot be met and needs to be applied to a similar purpose. The court can also modify the purpose even where the original purpose hasn’t yet failed.

What’s new?

One quick look at the new Trustee Act and you’ll see it is much more comprehensive. It applies to trusts regardless of their creation date, except where the Act provides otherwise. So what’s new? The Government of Alberta provides a helpful summary of the key changes:

• Trustee’s duty of care: exercise the care, diligence and skill of a person of ‘ordinary prudence’ subject to particular degrees of skills because of the trustee’s profession, occupation or business which requires a greater degree of skill
• Trustee’s duty to report to beneficiaries, respond to beneficiaries’ requests
• Allowing for temporary trustees
• Process to remove unfit trustees
• Process for trustees to resign
• Allowing trustees to act by majority
• Recognizing, validating, regulating non-charitable purpose trusts
• Allowing courts to use evidence from outside the trust document to determine a settlor’s (person who established the trust) intention

For More…

… on charitable trusts and how they differ from charitable corporations, see our Knowledge Base section on Establishing a Canadian Charity.

The post Bill 12 Revamps Alberta’s Trustee Act appeared first on CCCC Blogs.